On The US-Japan Digital Trade Deal: It’s Really About China
On Wednesday, September 25th, the US and Japan signed a digital trade deal that aims to promote the exchange of data and information through a high-level framework on intellectual property rights.
According to a fact sheet published by the Office of the United States Trade Representative, this agreement encompasses a “high-standard and comprehensive set of provisions addressing priority areas of digital trade” as listed below:
* Prohibitions on imposing customs duties on digital products transmitted electronically such as videos, music, e-books, software, and games.
* Ensuring non-discriminatory treatment of digital products, including coverage of tax measures.
* Ensuring barrier-free cross-border data transfers in all sectors.
* Prohibiting data localization requirements, including for financial service suppliers.
* Prohibiting arbitrary access to computer source code and algorithms.
* Ensuring firms’ flexibility to use innovative encryption technology in their products.
A cursory analysis of the fact sheet is that the agreement will result in the following:
- Lower barriers to digital good import and export by effectively lowering the overall cost incurred by the importing party. This is a win for Japan as it aims to set itself up as a cultural hub after the 2020 Olympic games. This will allow Japanese media publishers to license their products at a cheaper price without hurting their own margins, while encouraging US media outlets above and beyond Viz Media and Crunchyroll to take Japanese companies up on their offer.
- Remove most requirements to set up infrastructure in order to export digital goods to either country. This is most likely aimed at cloud service providers who provide goods and services that are accessible from outside the nation in which their infrastructure is set up, especially in FinTech given the wording, though I’m not entirely sure what exactly they had in mind (customer data collected through online banking, cross-border investing, income remittance, etc.?).
- Agree on a baseline understanding that neither government will allow commercial spying and stealing of core IP, while encouraging better encryption. The Japanese fact sheet published by the Japanese Ministry of Economy, Trade and Industry (METI) provides more color in their statement which suggested these governments will not allow companies to steal IP, not that the governments themselves will not be able to use backdoors to peek into what’s happening behind the scenes.
This deal has been described as a “minideal” by some — and I have to agree. It seems like a collection of very standard, high-level ideas that don’t require government intervention for the most part (perhaps except for the tariff piece). But what if this deal isn’t really about the US and Japan after all? Once you take the perspective of a someone trying to pressure another nation whose economic growth and ideological leanings have been diametrically opposed to yours, the pieces fall into place.
The US has had a rough go with China on all fronts. From the age-old notion of China as a rampant IP thief, to the recent trade war initiated by the US, the two nations have not had great trade relations. To make things worse, the tech culture between the US and China are so different that some even say that there will be two Internets — one US-centric, Silicon Valley-driven ecosystem, and another Chinese conglomerate-driven ecosystem — fragmented by different government regulations and ideals.
The effects of this rift has been felt by many in the industry — from Google which pulled out of China after internal backlash for complying with Chinese censorship requests, to AWS which touts two Chinese regions in which they have set up data centers operated through a two local corporations, and malware and government spying concerns across hardware made in China. Yet talks have been hampered by China’s ambition to continue its past breakneck growth to return to the position of global leader in innovation at all costs, combined with the US’s strong need to maintain its position as the leader of the free world, causing both nations to often mix economic arguments with ideological proselytizing.
It seems Trump is working on smaller wins which individually don’t create much of an impact for the sake of deal-making and showing his political prowess, perhaps mostly for the next election cycle. But once enough of these minideals have been struck, he might have an opportunity to finally strike a deal with the Chinese with support from the powerful coalition of countries he’ll have created by then.
